RPT-California fight tests US states' compact on business taxes

* Gillette wants Multistate Tax Compact to set taxes

* California would apply its own rules to razor maker

* $750 million in Calif. rebate claims could be at stake

By Nanette Byrnes

Dec 14 A landmark agreement forged 45 years ago
to make corporate taxation more uniform among U.S. states is at
the center of a court fight between California and Gillette Co,
potentially leading to more tax conflict between states and big
businesses.

Gillette, the razor giant owned by Ohio-based Procter &
Gamble Co, wants to be able to use the 1967 Multistate
Tax Compact (MTC) to determine how much tax it owes California.
This would cut Gillette's 1997-2004 tax bill by more than $4
million. The company is seeking a rebate of taxes already paid.

California wants Gillette to abide by more recent tax rules
the state has written and, as a result of the dispute, has
withdrawn from the MTC, reducing its membership to 18 states and
raising questions about the compact's future.

At a time of tight state budgets, the case is being closely
watched across the country. Early next year, the California
Supreme Court will decide whether to take the case under review.
Whether or not it does, more litigation is expected.

A victory for Gillette in California - which has by far the
largest economy among the 50 states - could unleash $750 million
in new California tax rebate claims, according to the state.

Similar disputes involving other companies are pending in
Michigan, Oregon and Texas. Experts expect more states to become
involved next year.

PATH THROUGH COURTS

The case dates to January 2010. That was when Gillette and
other companies filed claims saying California, as an MTC
member, must honor the MTC formula for apportioning state taxes,
and not impose its own formula. The claims were consolidated.

The other companies were Kimberly-Clark Corp,
Sigma-Aldrich Corp, RB Holdings, Jones Apparel Group
and Procter & Gamble, Gillette's parent since 2005. They
argued that under the MTC, their tax bills, with interest, would
be $34 million less than under California's math.

The state went to court and prevailed at trial in San
Francisco Superior Court, but then lost before the State Court
of Appeals in July. In November, the state's Franchise Tax Board
appealed to the California Supreme Court to hear the case.

In finding for Gillette, the appeals court ruled that the
compact was a binding obligation on California which subsequent
legislation did not erase. Only California's withdrawal from the
compact would do that, the court said.

The state dropped out of the MTC in June, an action that
could protect it from future claims. But if other states follow
California's lead, seeking to avoid trouble from companies
testing the Gillette approach, MTC membership would shrink,
potentially ushering in a newly fragmented system pitting states
against corporate taxpayers a case at a time.

Joe Huddleston, executive director of the Washington-based
Multistate Tax Commission, an interstate group created 45 years
ago to administer the compact, said the principles of state tax
cooperation remain strong. But he predicted the Gillette case
would have broad implications.

COOPERATIVE EFFORT

Forged to promote equitable apportionment of tax dollars
among states, the MTC represented an effort by states to ensure
that companies operating in multiple states not pay tax on the
same income to more than one state.

Tax consistency was seen as a benefit both to states, which
used the compact to fight off federal intervention on the topic,
and to multistate companies seeking fair taxation. The MTC
includes a formula whereby companies place equal weight on their
property, payroll and sales in a given state when calculating
how much tax they owe there.

In the years since 1967, many states, including California,
have moved away from the MTC formula. To favor and attract
businesses within their borders, these states have rearranged
the way they tax business income so that in-state businesses pay
less and out-of-state businesses pay more, explained University
of Connecticut Law School Professor Richard Pomp.

Annette Nellen, professor of accounting and finance at San
Jose State University, said the change is an example of how the
state has used the tax code as an economic development tool.

In California, the state's recent rules added up to millions
of dollars in additional costs for the companies involved in the
Gillette case. All of them are based outside of California.

The California Franchise Tax Board declined to answer
questions about the case or the claim that its formula benefits
local companies. It cited a policy of not discussing pending
litigation.

Gillette and Procter & Gamble both declined comment on the
litigation, as well.

The MTC is one of more than 200 compacts in force among the
50 states. The tax compact takes in nearly every state in one
form or another. With California's withdrawal in June, the
compact now includes 18 states and the District of Columbia as
full members. Another 23 states are associate members and attend
meetings and in some cases take part in other programs, such as
joint taxpayer audits. Six other states support the MTC's
purpose, but are not participating members.

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